3 Stocks That Deliver Deep Value for Investors

by Richard Band | December 10, 2013 8:00 am

3 Stocks That Deliver Deep Value for Investors

I’m not arguing that the market can levitate forever. At some point, share prices will get so inflated that even the gentlest pinprick of negative news will burst the balloon. However, it doesn’t appear we’ve arrived there quite yet.

Until the warnings start flashing more frequently and urgently, I advise you to continue accumulating stocks and equity mutual funds. Be cautious and selective, though.

If you prefer to buy individual stocks, zero in on the few high quality names that would represent good value at today’s prices even if the market indexes were 10%–15% lower. In other words, purchase only the most deeply undervalued blue chips. “Fairly valued” isn’t good enough!

Start with Baxter International (BAX[1]).

Healthcare is an industry with many attractions for investors: favorable demographics; the necessity factor; patent protection; generally strong managements and balance sheets among the major players. BAX, a leading provider of blood-related products (including dialysis equipment), enjoys all these benefits. Earnings and dividends per share have tripled in the past decade.

The stock was hit with a flurry of selling after a brokerage firm predicted that a new bloodclotting drug from Biogen Idec would start to chip away at Baxter’s sales in the first half of 2014. While I agree the new Biogen medicine will likely make some inroads, I  continue to expect that BAX will post record profits in 2014, 2015 and beyond—partly because of other products in Baxter’s stable and partly because the company is already working on a longer-acting drug to go head to head with the Biogen compound.

Baxter’s next-generation drug could win FDA approval as early as 2015. In the meantime, Mr. Market is letting you buy this world-class medical franchise for 13X estimated 2014 profits—a discount of 40% from Baxter’s P/E in 2007, near the last market peak. The shares also reward you with a 3% dividend, well above the market average.

Fortress Stocks for 15% and Up

Once you’ve filled your shopping bag with all the BAX you can hold, go on to these two fortress stocks, both of which I reckon will deliver a total return of 15%- 20% over the next 12 months.

Coca-Cola (KO[2]).

The Wall Street crowd these days is paying almost no attention to Coke. Why bother when you can tweet about the Twitter (TWTR[3]) IPO? I’m not going to bash Twitter; maybe it will turn out to be a great investment. But I wouldn’t stake my future financial security on it. KO, on the other hand, has demonstrated real staying power as the world’s most recognizable brand for a century or more.

Not too shoddy an investment, either: If you had bought one share of Coke for $40 at the company’s initial public offering in 1919, your stash (with stock splits and reinvested dividends) would now be worth about $10.8 million. How about today? Start with KO’s 3% dividend,which the company has sweetened at a 6.4% compound annual rate over the past five years.

Add those two numbers together. If we assume conservatively that KO’s dividend yield and growth rate remain constant, the stock should double your money (price gain plus reinvested dividends) over the next eight years. I figure it will take an index fund two to five years longer to reach that goal.

International Business Machines (IBM[4]).

Big Blue may lack the fashion cachet of Apple (AAPL[5]), and the quasi-monopoly dominance of Microsoft (MSFT[6]). What sets IBM apart, though, is a shareholder-friendly management relentlessly focused on efficiency and innovation. When IBM finds that one of its business lines (such as PCs or mainframes) no longer generates attractive returns on capital, management promptly pares down or gets rid of that operation. It’s just such a transition that caused Beamer to report a 4% decline in sales for the September quarter. (IBM is rapidly shedding its low-margin hardware businesses.)

Meanwhile, operating profits—the number that really counts— surged 10% from a year ago.

IBM also regularly “shares the wealth” with the company’s owners. During the five-year window from 2011 through 2015, IBM expects to return $70 billion to shareholders in the form of dividends and buybacks. This steady, consistent blocking-and- tackling is what attracted Warren Buffett to the stock. (He owns $12 billion worth.) I’m dropping my dime in, too. Current yield: 2.2%.

 

Endnotes:
  1. BAX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAX
  2. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  3. TWTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWTR
  4. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  5. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  6. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT

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